Universal Health Care for the Ownership Society

Sooner or later, Republicans will be forced to offer a pragmatic alternative to the Affordable Care Act. We haven’t done this because health care is a miserable political swamp for the GOP. It forces us out of our comfort zone, leaving us to confront problems that do not yield to our favorite, market-driven solutions. We can’t put this off forever. We need to move past slogans and build a plan.

The fundamental problem with health care as a market is that the “consumers” in a medical marketplace are typically ill, sometimes seriously so. A patient’s vulnerability creates a coercive effect which ruins the price-setting mechanisms of a market. This means that the tools we love most in other scenarios fail us here.

We can’t simply stand pat. Our current system is an escalating disaster. It is vastly more expensive than anything found elsewhere in the world. Its costs fall heavily on businesses ($500bn a year) and local governments ($400bn a year). Our system chains families to an employer, since individual coverage is grotesquely expensive.

Employers are groaning under spectacular costs, while retirement is being priced out of reach by the dangers of medical costs. And this system punishes the activity that our economy most needs – entrepreneurship.

The Affordable Care Act takes the existing model and buries it in a blizzard of bureaucracy. It mandates individual coverage without creating any realistic method of making it affordable. It retains our dependence on employment-based insurance while creating burdens on business which will cost millions of Americans their coverage. It is less a solution than a crisis engineered to force a solution.

The country needs a solution that acknowledges the strengths and weaknesses of our current arrangements along with the political realities than constrain our options. How can Republicans build a solution that meets conservative desires for an ownership society and liberal ambitions for universal care? Like this:

Create a Federal program for universal private insurance coverage. This program would be funded by a payroll tax and each state would have to decide whether to participate. This combines characteristics of the French (coverage and service by private providers) and the German (controlled by individual states) systems.

The program would fully fund the purchase of a private insurance plan with no premiums or deductibles. Any insurer who participated would have to insure everyone, without ratings. The menu of policies would be fairly uniform and would include co-pays to avoid over-consumption.

In effect, every citizen of every participating state would be aggregated into a giant pool. Insurers would operate in a manner similar to our utilities. They would compete on quality of service and derive profit from administrative efficiency.

Medicare and Medicaid would be obsolete, since everyone in the opt-in states would have full private coverage. The programs would be wound down over a five year period, shrinking the Federal workforce by about 8,000 and replacing a $600bn a year expense. States that chose not to participate in the Federal universal coverage program would have to replace Medicare and Medicaid on their own.

Some states might opt-out in favor of true-single payer healthcare, as California and Vermont have already tried to do. They would find this process far easier under this system than under our Federally-controlled approach. Others would…well, have to think real hard about whether Rick Perry is right for their future.

There are two main challenges in such a system, along with a galaxy of small complications. First, the cost, though cheaper than our present approach, would be relatively transparent and individual, leading to some political difficulties. Second, rules would have to be established to prevent “state-shopping.”

The cost of this proposal would be readily apparent while the savings would show up in a thousand small ways. Research suggests that such a program funded by a flat payroll tax with an income cap of around $250K a year would require a tax rate ranging somewhere between 11-13%. That’s consistent with a study done for the state of Minnesota and with the proven cost of the French system.

Much of that cost could be borne by employers in the form of a payroll tax without significantly burdening individual contractors or entrepreneurs. Their challenge is not so much FICA as the nearly bottomless cost of insurance and the difficulty obtaining individual coverage.

For an analysis, use the highest cost estimates and assume a system in which the individual payroll tax burden is 4% and the employer portion is 9%. Then consider the fact that this tax would replace the 3% we already pay in FICA for healthcare (split between employer and employee). There would also have to be some provision for individuals earning capital gains, perhaps at a slightly lower rate.

You get a comparison that looks like this:

Take a family of four earning the 2013 median income of $75,000. They have a better than average insurance plan provided by an employer, which costs $3600 in annual premiums with a $1000 deductible. In reasonably healthy years they spend about $4,200 on premiums and co-pays. They pay $1,087 in Medicare taxes. Their annual out of pocket for insurance, care, and related FICA taxes is about $5,300.

The employer’s cost for a plan this generous would be about $18,000. The employer pays an additional $1,087 in Medicare taxes for this employee. Under the present system, this family’s health care in a healthy year costs the employer about $19,000 (subsidized by a tax deduction) and costs the family directly about $5,300.

Under this plan the family would no longer pay premiums or deductibles. Their 1.45% FICA tax ($1,087) would be replaced with a 4% tax, costing $3,000. They would still have a private insurer of their choice with some responsibility for co-pays. Their average “healthy-year” costs would be about $3,500 instead of $5,300. The employer’s costs go from $19,000 to $6,750 and they no longer have to shop for health insurers.

The main political problem with this plan comes from its impact on higher-earners. Families in very good health earning more than about $150,000 (top 15%) who have good insurance from an employer will find this plan costing more out of pocket per year than our current system. They will see other benefits from the change, but they may not recognize them.

First, they will never again worry about losing health care if their company collapses, they start a business, or they retire. They won’t need to carry enough life insurance to cover health insurance premiums. They will no longer fear the prospect that a child’s illness will destroy their chance for retirement or their ability to pay for college.

Wealthier taxpayers hit by the new tax would experience vastly greater opportunities to semi-retire, work as contractors, or launch a new business, since those choices will not burdened with the spectacular fixed cost of individual health insurance. And they will live in a country that provides good quality medical care to all of its citizens without going further into debt.

If the resistance to the new tax burden were strong enough, a state could simply opt-out of the plan and finance medical coverage in another way. There would be a political outlet valve and the possibility that someone could develop a better approach.

The State shopping problem could be curbed fairly easily. New residents to an opt-in state would not only pay their tax, they would pay additional premiums influenced by how many adult years they had been living in an opt-out state.

If my income in an opt-out state dropped to zero I might be attracted to an opt-in state to obtain health care. I would have to pay a health insurance premium, perhaps $400 a month, for a fraction of the years that I had been living as an adult in an opt-out state. Still attractive, perhaps, but not exactly a free ride.

This plan could appeal to conservatives by shrinking the Federal bureaucracy, strengthening small businesses, fostering entrepreneurship, and retaining access to private, for-profit insurers. It would also restore the authority of individual states to build innovative care structures appropriate to their needs.

Liberals would finally get universal, tax-financed health care. Never again would anyone go bankrupt because of an illness in the family. The poor would have access to exactly the same care as everyone else.

There would still be hundreds of details to work out, more than can be addressed with this already long post. For the purposes of a political platform, that’s fine.

Our medical finance system provides quality care to the successfully employed, the elderly, and the wealthy. Everyone else is left to struggle through one stopgap or another. This is a poor practice that has made our system wildly expensive while delivering unimpressive outcomes and dampening business innovation. Most of all, it is morally intolerable.

Conservatives must abandon their dead-ender commitment to obstructing any and every possible solution to our medical finance problems. It’s time to face facts and try to build real-world solutions that can lead to better health outcomes, limited government scope, lower costs, and preserve the greatest possible range of individual autonomy.